By Spencer Mann,
Money and Investing Writer
As a company that has seen its share of press, from comparison by its competitors to countrywide protests outside of its stores, Verizon Communications (NYSE: VZ) has again put itself into the business news world. This past week, the company announced plans to cut costs in multiple facets of corporate operations.
The stated goal by a company executive at a Goldman Sachs news conference this past week was to lower expenses and other costs by $10 billion over the next four-year period. This news likely came to please shareholders, as the projected savings are expected to be used to fund dividends.
According to NASDAQ.com, this move came after Verizon’s board already approved a 2.2 percent dividend increase from last quarter. The company has been raising this expenditure for 11 consecutive years, and plans for this trend to continue.
With its history of funding dividends, Verizon likely realized the future problems this activity will cause without change to its business plan. In the hopes of keeping the public content, the company decided to put a plug in its rising costs.
In a one-year span between the second fiscal quarter of 2016 and 2017, Verizon’s long-term debt rose 8 percent. This figure likely sparked a set of concern for company executives when determining the future prospects of its dividend program. However, the underlying numbers suggest a more longstanding issue than just the last year when evaluating business costs.
Verizon boasted a 4.67 debt to equity ratio at the end of last quarter, a figure that has risen in recent years. This ratio evaluates how much of a company’s activities are funded by debt as compared to equity. For comparison, AT&T’s (NYSE: T) ratio at last quarter was 1.15. Investors typically prefer a lower ratio, as it signifies that a company is paying more of its expenses from its own funds. That is not the situation for Verizon.
While Verizon holds a high debt to equity ratio, this is not a cause of absolute panic for investors. If Verizon did not pay increasing amounts of dividends, it would likely to be able to fund more of the company operations from retained earnings. With that in mind, however, investors may look to AT&T which pays out a similar percentage of net income as dividends and question Verizon’s business the past few quarters.
One defense of Verizon’s debt numbers would include the fact that the company sees itself in a state of change. The company has recently invested in new technologies that it plans to roll out into the consumer market in the coming years. Additionally, the acquisition of Yahoo earlier this year likely marked the beginning of a digital focus to the company’s future plans.
Consumers and workers alike have scrutinized Verizon. Whether it was the massive worker strikes that occurred last year or the increasing prices of its services, Verizon has struggled with its reputation. However, with debt continuing to rise, the Verizon’s executives appear to understand the importance of better leveraging the company to keep its shareholders satisfied.
As the company continues to invest in new business practices, it has to adjust to its increasing debt so the board can approve the dividend payments (and the increases). If the entire $10 billion in costs is reduced on time is a question that investors will wait to see.
A version of this article appeared in the Tuesday, September 26th print edition.
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